Don’t bank on surplus or rate cuts: Norris

Retiring
Commonwealth Bank of Australia
chief
Ralph Norris
said he would not bet his house on the budget returning to surplus on time, adding that global conditions would determine whether lenders passed on any future official interest rate cuts.

Issuing a dire warning about the international economy, Mr Norris told The Australian Financial Review that Europe’s debt woes were entering a hazardous period that could rival the dark days of the financial crisis.

Mr Norris retires today after an often tumultuous six years leading the country’s biggest bank.

In an interview before he hands over to successor
Ian Narev
, Mr Norris said the domestic ­economy was resilient but not immune from the contagion that was spreading from Europe. “The issue now is that we are talking about nation states [in trouble], not just companies," he said.

“That has the potential to have very significant flow-on effect . . . particularly if [global] banks have to take significant write-downs to address this problem."

Expectations are building that the Reserve Bank of Australia will cut interest rates to safeguard Australia from the turmoil offshore and cushion any impact of the Gillard government’s cutbacks, but Mr Norris would not be drawn on whether ­lenders would hand the savings down to mortgage customers.

However, he acknowledged the notion of lenders automatically following the RBA was dated, as the trouble on international markets forced up the cost of funds that banks borrow to lend to customers.

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Asked whether there was any guarantee that rate cuts would be passed on, Mr Norris said: “Nobody can give unqualified guarantees in anything in life . . . At this time I would have to say it will be what the situation is at the time the RBA makes its cut."

With the federal government announcing major spending cuts as part of its Mid-Year Economic and Fiscal Outlook yesterday, in order to meet its promise of a budget surplus in the 2012-13 financial year, Mr Norris said the deteriorating global economic environment would make it harder to avoid a deficit.

The government has staked its ­economic credibility on bringing the budget back to surplus. But Mr Norris said the timetable for a return to surplus might need to be stretched if problems in Europe persisted.

“If the Australian economy grows above trend over the next 12 to 18 months, then that [a surplus] is a possibility, but I think at this stage I wouldn’t be betting my house on the fact they are going to run a surplus because there are a lot of unknowns based around the current state of world markets and what growth projections are and what sort of flow-on effect that has on the Australian economy," Mr Norris said.

“We have already seen significant flow-on effects on revenues and tax receipts. That could continue. If that continues, then that does make it more difficult to post a surplus in this environment."

Mr Norris took over the top job at CBA from David Murray in 2005 after a successful spell running Air New Zealand, and quickly set about transforming the bank by weeding out any remnants of a public-sector bureaucracy and installing a more customer-focused culture

His reign was interrupted by the upheaval of the financial crisis, though the upshot was an opportunistic acquisition of Western Australia’s Bankwest for a fire-sale price at the height of the turmoil when its then owner, United Kingdom-based HBOS, was teetering.

Although Mr Norris is highly regarded in business circles, the 62-year-old became the focus of an angry public outcry after CBA raised home loan interest rates by more than the Reserve Bank rate rise on Melbourne Cup day in 2010. The move was blamed on higher funding costs for banks in the aftermath of the financial crisis, but the controversial step strained relations with the federal government and drew heavy criticism from disaffected customers.

Soon after, it emerged that Mr Norris earned a salary of $16 million that year, and although this was cut to $8 million in 2011, negative headlines about overpaid bankers galvanised public perceptions against him.

While he has no regrets about the rates decision, Mr Norris makes no bones about the fact the personal ­critisism was out of place.

In financial terms, he leaves CBA on a high after it reported a record $6.8 billion profit for the 2011 financial year. Reflecting on his time at the helm of CBA, Mr Norris said he hoped he would be remembered for driving cultural change at the bank.

He said his biggest regret was CBA’s involvement with Storm Financial, a financial planning group that collapsed leaving retirees out of pocket, though Mr Norris was instrumental in making amends by establishing a compensation fund.

Despite wearing heavy criticism, Mr Norris stood by the controversial decision to lift home loan rates by more than the RBA last year.

“I regret the outcry, but I couldn’t control the outcry," he said.

“What I could control is making the decision. If I had to make the decision again in the same circumstances, I would make the same ­decision."

With world markets in disarray as Europe’s leaders struggle to find a solution to the region’s debt problems, Mr Norris warned funding costs for Australia’s banks were on the rise.

Australia’s major banks have little or no direct exposure to the crisis engulfing Europe. But the ensuing volatility is pushing up the cost of the funds that they borrow on inter­national money markets, which in turn puts pressure on the interest rates that they charge home loan ­borrowers.

After the RBA cut the official cash rate by 0.25 of a percentage point on November 1, CBA passed on the full saving to its mortgage customers.

However, rival National Australia Bank transferred only part of the rate reduction to borrowers, citing higher funding costs.

“As far as where [bank] interest rates are likely to go [in the future if the RBA cuts], I would suggest that is not a problem for me any more and it is perhaps an issue for my successor," Mr Norris said.

He admitted his relationship with the government had been “tested" at times during his reign and said the current political environment, with minor parties and independents controlling the balance of power, was not ideal.

“I think the danger with minority governments is that you end up with the tail wagging the dog in order to get legislation through, which becomes less effective than what it may otherwise have been . . . I think minority governments end up, generally, with policy outcomes that are less than optimal," he said.

Commenting on his successor, Mr Norris said Mr Narev was taking over at a “less than desirable" time given the economic backdrop, but added he had the skills to see CBA through any crisis.

“Ian Narev is going to be an outstanding chief executive," Mr Norris said.

Looking ahead, Mr Norris will join the board of New Zealand dairy group Fonterra in May and says he will consider other suitable board appointments in Australia.

He will spend most of his time in his native New Zealand, although he will maintain a home in ­Australia.

“It is a bitter-sweet experience," he said of leaving CBA.

“The last six years have been the most challenging and the most satisfying in my career."